Why is inflation rising so fast? The prices of items in the US have climbed by up to 5.4% year-over-year, according to information released by the bureau of labor statistics. The indexes of commonly consumed products such as food shelter and gasoline have been the main drivers of inflation growth in the last few months. As we know, these items are very basic to the survival of the common American, which makes it even more impossible to turn around the situation at hand. Herein, we shall look at the reason behind the sudden increase in the rate of inflation, and what lies ahead, so if you are interested to discover more, read on until the end of this article.
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The situation on the ground
In September 2021, prices went up by about 0.2%, which was slightly higher than the inflation rate in August. Overall, commodity prices have increased by 4% over the last year, a rate that is above the 2% target set by the Federal Reserve.
Some specific items may have highly contributed to today’s historic inflation gains including the purchase of new vehicles. The prices of vehicles were up by 1.3% in September 2021, which contributes to an overall increase of 8.7% over the last 12 months. The prices of gas went up by 1.2% in the last month, with the same rate of inflation being recorded with groceries. In fact, over the last 12 months, the prices of food have shot up by 4.6%. Shelter costs have gone up by 3.2% over the same period.
Home appliances such as washers and dryers, different pieces of furniture, and bikes have seen significant price increases over the last 5 months. As the global economy adjusts to the state of the post-pandemic world, most raw materials are in short supply, and suppliers have not established ways to deal with the overwhelming surge in demand. There is hope that at some point suppliers will adjust and the shortages of raw materials will dissipate, but we, unfortunately, do not know how long this is going to take.
How bad can things get?
If inflation goes over the roof, the Federal Reserve is likely to increase interest rates in a bid to slow down the economy to prevent a repeat of the events that happened in the late 1970s, and the early 1980s. This kind of Federal Reserve action has been the cause of a recession in the past.
Currently, the economy isn’t at a very alarming phase, but the price jumps are unlike anything that we have experienced so far. Rising from the pandemic is similar to a “lights on”, effect in which the demand for new items has come back at lightning speed. In my view, the demand may be too much for the economy to handle.
Economists have three concerns which are:
- Americans may start believing that price hikes are here for good -The main problem with this is that people could be tempted to spend a lot of money in the present then stop spending later on in the year in an attempt to beat more prices hikes.
- During the pandemic the US government injected massive amounts of aid into the economy, making things worse
- Wages and rents are beginning to rise, and such effects are expected to last for a long time.
Price increments on goods such as cars and bikes are mostly short-lived since companies eventually produce more. Unfortunately for the price increases on services such as rent, it is hard for us to expect a decline in the future especially if the companies increase wages by a significant amount of money. Businesses often find themselves passing the extra costs to the consumers. Employees then ask for more pay from their employers, which then kick-starts the hype cycle again.
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Should you be concerned about the state of affairs, and Is there something that you should do?
Currently, we are in a yellow traffic light situation. From my observation, people are on high alert, but there is not much panic yet.
The one thing we have to ask ourselves is whether inflation will stick around and for how long it will do that. Economists and Wall Street traders are keeping a close eye on rent and other services with the hope that they will pick signs of a spike. We have already seen rent shoot up by a modest 1.8% in the year that has passed. As people return to the cities to occupy abandoned buildings (that they left during the pandemic), we expect rent to keep on increasing.
Another indicator to keep an eye on is the bond rates. Even with the worse than expected inflation data, bond yields are barely moving. The interest rates on the popular US Treasury bonds have been well below 2% for a long time. There is, however, hope that’s the demand for the bonds may drive the bond yields, since more investors are worried that they are earnings will get eaten into by inflation. Again, This is quite speculative, and no one knows exactly how much damage inflation will do to an investment portfolio before things realign.
Besides locking in on service prices (e.g. on rent), before they are out of range, there are not many other viable solutions that paper asset investors can implement. If you currently have a portfolio that consists of several stocks, they may not be of much help if we get into the red traffic light situation. That said, however, it will be necessary to consider investment strategies such as diversification through the addition of assets that have been known to keep up and weather inflation.
This will be a good time, in my opinion, to consider opening a gold IRA account, if you have any hope of preserving your wealth and smiling at the end of the current inflation run (if it ever comes to an end anyway).
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That will be all for this article in which we have addressed a very important question about why inflation is rising so fast. As an investor, you have every reason to be concerned about this force of the market. The good news, however, is that there is a solution to this problem, and you can implement it today to safeguard your future. Let me know if you have any questions with regards to today’s topic. Drop them all in the comments section, and I’ll get back to you ASAP.
I wish you well,
Eric, Investor and Team Member at Gold Retired!
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